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Japan-like fertility rate, aging population pose threats to China

by Takashi Kitazume

Staff Writer

The rapid aging of China’s population poses a serious threat to the country’s future growth and social security, and policy actions need to be taken now to deal with the repercussions in the coming decades, said a senior Chinese scholar from Shanghai.

Having overtaken Japan as the world’s second-largest economy in 2010, China has followed Japan’s path in the graying of its population, which is forecast to also start declining within the coming decade or so, Zuo Xuejin, executive vice president of the Shanghai Academy of Social Sciences and director of the academy’s Institute of Economics, said at a recent seminar in Tokyo.

With the world’s largest population at 1.34 billion as of 2010, China has seen its total fertility rate — the average number of children born to a woman in her lifetime — fall since the 1970s to hit between 1.4 to 1.5 today — not much different from Japan, Zuo said at the Feb. 20 event organized by the Keizai Koho Center to discuss the nation’s demographic challenges and their socioeconomic impacts.

In the first decade of this century, the proportion of youths up to 14 years old in the entire population fell from 22.9 percent to 16.6 percent, whereas people 65 years or older accounted for 8.8 percent in 2010, compared with 6.96 percent in 2000. A longer-term comparison of 2010 data to figures from 1982 shows the share of the youth population as having fallen to half the 33.6 percent and that of the elderly having nearly doubled from the 4.9 percent three decades ago, Zuo pointed out.

This trend is set to accelerate in the coming years, with a median-scenario forecast by the United Nations showing that by 2050 the population will fall below the 1.26 billion recorded at the end of the 20th century and the elderly will account for 28 percent of the total, Zuo said.

Under a more extreme projection, China’s population will peak at 1.35 billion as early as 2015 and start falling — 10 years after the downtrend in Japan’s population began, he said. Under this scenario, people 65 or older will account for a quarter of the population in 2040.

These demographic trends will have severe effects on labor supply and demand, Zuo said. Labor shortage started to emerge as a problem for foreign investors in the so-called Pearl River Delta — a triangular area encompassing Guangzhou, Hong Kong and Macao, and one of China’s most populous regions — as early as 2003, pushing up wages and social security burdens, he said.

Just as has happened in Japan, a rise in the ranks of the retired elderly — and a relative decline in the working population — will result in the decline of China’s domestic savings, Zuo said.

Chinese born during the peak years of the nation’s fertility rate in the 1960s will hit retirement age within the coming decade or two, and in a traditional economic model, a falling supply of labor and lower investments as a result of a decline in savings will decelerate economic growth, he said.

While the growth of China’s gross domestic product topped 9 percent in 2011, the government estimates a slower growth of 7 percent in the current five-year economic plan, and this trend will likely continue in the years ahead, Zuo said, adding that in a Chinese Academy of Social Sciences forecast, the average annual growth will fall from 8.9 percent in the 2011-2015 period to 6.9 percent between 2016 and 2020, and further to 5.6 percent in the subsequent decade.

The low fertility rate and the shrinking ranks of youths are already having a direct impact on education, Zuo said. This year, the number of people applying to enter universities in China fell by 800,000 from the previous year, he said. The number fell 600,000 in 2011, following a decline of 400,000 in 2010 — an indication that the trend is accelerating, he noted, adding that the falling enrollment will result in the closure of some universities in the future.

On the other hand, the aging of the population will push up the demand for medical services and nursing care for the elderly. Another question that arises is that prices for services such as long-term care for people in their 80s, who will have to rely on their savings and social security benefits, could rise substantially if demand is to shoot up, Zuo noted.

As the labor shortage question looms, China’s investments in human resources are still far from sufficient, with the government spending on education, for example, standing at 3.4 percent of the nation’s GDP, Zuo said.

China has invested heavily in the development of “high-end” human resources but has not done much in terms of building “mid-level” human resources, Zuo said, urging the government to spend more on university education.

While many scholars in China advocate greater spending on long-term human resources development against such a background, local administrators tend to prioritize investments in public works projects that would bring more immediate results in terms of GDP growth, he said.

China’s labor market in itself is inefficient in many aspects because of the divide between urban sectors and rural farming areas, Zuo added, calling first for the free movement of workers.

Ultimately, a fundamental solution to social security issues will be impossible if the ratio between the working population and the ranks of retirees is too far off balance, Zuo warned.

He said that the government will likely make some adjustments to the current one-child policy in the coming years. Still, the nation’s fertility rate will continue to be low even with such a policy change, considering that the problem is also common to other Asian economies such as Taiwan and Singapore, Zuo said.

Zheng Gongcheng, a professor and director of the Social Security Research Center at the Renmin University of China, also spoke at the seminar to discuss the risks involved in China’s pension system and policy challenges to deal with them.

Zheng stressed that the risks in the Chinese system are different from those in Western economies. The biggest problem is the risk of an erosion of China’s social security fund through investment failures, he said, adding that a rational strategy to hedge against investment losses needs to be established.

Since China is still in the process of expanding the coverage of its pension system nationwide, the peak in its social security expenses is forecast to emerge sometime later — perhaps at a time lag of about 10 years — after the aging of its population hits its peak, Zheng said. This means that China is allowed some time to adjust its pension schemes to deal with the full thrust of its future demographic changes, he said.

Another leeway that China has in greater degree than many Western economies, Zheng said, is that Chinese workers today retire at age 52 on average, in contrast to countries such as Germany and Britain, which have already moved up the mandatory retirement age to 65. China has more room to adjust its pension scheme finances by pushing up the retirement age of its workforce, he said.